Teva Announces $17.5-Billion Operating Loss; Restructuring on Track

By Akia Thorpe -

February 9, 2018

Teva Pharmaceutical Industries has reported a $17.5-billion operating loss for 2017, mostly relating to its US generics business. Teva’s President and Chief Executive Officer Kåre Schultz said the company is on track for its previously announced restructuring plan, which involves job reductions of 14,000, half of which are expected to be completed by the end of the first half of 2018.

“2017 was a challenging year for Teva,” said Schultz in a February 8, 2018 statement in commenting on the company’s financial results. “Starting 2018 we are focused on meeting our financial obligations and ensuring a much more solid and sustainable business model going forward. We are making strong progress on the restructuring plan, and I am optimistic about the progress made and remain confident in our ability to deliver on our targets in the coming year.”

Teva reported 2017 revenues of $22.4 billion, an increase of 2% from 2016, and GAAP (generally accounting principles) gross profit of $10.8 billion, down 9% compared to 2016. It reported an operating loss of $17.5 billion in 2017, compared to operating income of $2.2 billion in 2016, mainly due to the performance of its US generics business. The company reported goodwill impairments of $17.1 billion in 2017, mainly due to its US generics reporting unit. Teva had previously reported a goodwill impairment charge of $6.1 billion related to the performance of its US generics business in the second-quarter of 2017.

“During the fourth quarter of 2017, we noted further deterioration in the US generics market and economic environment, further limitations on our ability to influence generic medicines pricing in the long term, and a decrease in value from future launches,” said the company in its 2017 earnings release on February 8, 2018. In 2017, revenues of the company’s generics business, which accounted for 55% of the company’s 2017 revenues, was $12.26 billion, up 2% from $11.99 billion in 2016, with revenues increasing to reflect the full-year impact of Teva’s $40.5-billion acquisition of the generics business of Allergan’s generic business, which was completed in August 2016. In the fourth quarter 2017, Teva reported generic medicines revenues of $3.1 billion, a decrease of 16% compared to the fourth quarter of 2016. Overall segment profit in its generics business in the fourth quarter of 2017 was $740 million, down 31% from the year-ago period, when the company reported a segment profit in its generics business of $1.075 billion.

The company cited several factors contributing to the performance of its generics business as outlined below:

Additional pricing pressure in the US generics market as a result of customer consolidation into larger buying groups capable of extracting greater price reductions;

Pricing challenges due to government regulation;

Accelerated US Food and Drug Administration approval of additional generic versions of off-patent medicines, resulting in increased competition for these products;

The recently enacted US tax reform legislation, which the company says is expected to limit its ability to achieve targeted tax efficiencies compared to prior estimates.

Teva’s results in 2017 were also impacted by declining revenues for its lead specialty product, Copaxone (glatiramer acetate), a drug for treating multiple sclerosis, due to increased generic-drug competition. In 2017, Teva reported Copaxone revenues of $3.8 billion, down 9.5% from $4.2 billion in 2016.

Restructuring on track

In commenting on the company’s 2017 results, Teva’s president and CEO said the company’s previously announced restructuring plan is on track. In December 2017, Teva announced a detailed two-year restructuring plan that included a reduction of 25% of its workforce or 14,000 positions globally, closures or divestments of research and development (R&D) facilities and offices, and a $3-billion reduction in its annual costs. This followed an announcement by Teva in November 2017 of a new organizational structure and executive management team and an announcement in August 2017 of plan to close or divest 15 manufacturing plants.

“The short message on the restructuring plan is that everything is on plan, everything is on target…,” said Schultz in the company’s earnings call on February 8, 2018. “We have our new organizational structure in place for all levels down in terms of management teams, and it's this new organization that has created our annual operating plan for 2018…The short message is we are on track to achieve the $3 billion spend base reduction that we communicated earlier and that more than half of this will happen in 2018 and the full amount will be realized in 2019,” he said.

Schultz provided an update to specific targets in the restructuring plan, including for job reductions. “We have planned, as we communicated in December, a reduction of our global workforce from 53,000 to 39,000, so 14,000-persons reduction,” Schultz said on the company’s earnings call. “Half of this reduction is expected to be completed by the end of Q2 this year, and the remaining half will be over the following six quarters throughout 2018 and 2019.”

Schultz also highlighted the progress in the company’s manufacturing rationalization. “Everything is moving according to plan,” he said on the earnings call. “This includes a lot of closures and divestments as we've alluded to before. In this period here, we have had six announced closures of plants since we announced the restructuring plan. And we're expecting to announce another six plants by year end of this year. But this is, of course, an ongoing process to consolidate our manufacturing footprint, a process which will go on all the way through 2019, but also during the following years.”

On a product basis, he said that the company is on track to discontinue 25 programs in its specialty medicines portfolio and over 100 in its generic medicines portfolio. “We've also taken a very close look at all our R&D programs,” said Schultz on the earnings call. “…[I]n the specialty area, we have cut roughly 27% of our programs. Basically these are programs that fall outside our core expertise area and where it's very speculative whether we would be able to return a profitable investment out of these programs. And we have also trimmed our generics portfolio. We have the world's largest portfolio of generic filings. And we've done a reduction there of a minor scale, but still it's 100 programs.”

Looking ahead

For 2018, Teva provided non-GAAP revenue estimates of $18.3 billion to $18.8 billion and non-GAAP operating profit of $4.0 billion to $4.3 billion. The company expects global Copaxone sales of $1.8 billion in 2018, which assumes ongoing erosion of the franchise from recent generic competition and assumes a second generic launch of a 40-mg formulation as early as April 2018. US generics sales are expected to be approximately $4 billion in 2018, a decline of roughly 20% versus 2017.

“With regards to the outlook for the full-year 2018, you will see here that we are expecting a significant reduction of revenues,” Schultz said in the company’s earnings call. “There are really four main reasons for it. You could say a quarter of it is structural. These are items like the Women's Healthcare that we have sold off, some distribution businesses we've sold off, the Venezuela business that we've deconsolidated, and so on. That's roughly a fourth of the decline, and then you have another fourth, which is roughly the generics, the price pressure we've seen in the US and also some of the changes we've seen in Japan, and then there's roughly half the decline which is related to the generic competition on Copaxone.”